Well, it’s about tax time again for all of us US citizens. Many people are wondering what, if any, tax forms they need to file. The United States tax system operates on the principle that U.S. citizens and residents are taxed on their worldwide income. To enforce these laws, the IRS has imposed various filing obligations backed up by draconian penalties for those who fail to comply.
Below is a summary of the most common filing requirements and possible penalties for failure to file or comply. People ask me about these tax forms often, and I’ve written about them several times over the past year. But considering that the penalties for failure to file can be fines of up to $100,000 it’s probably good to review what they are.
The three big tax forms that offshore investors most often need to file are:
- FinCen 114 (FBAR) for International Bank and Brokerage Accounts
- Form 8938 for Specified Foreign Financial Assets
- Form 5471 for Officers, Directors, or Shareholders in Certain Foreign Corporations
There are other forms relating to offshore businesses, bank accounts, trusts, and structures. If you have any assets overseas, you want to consult with an international tax professional.
Here’s the disclaimer: I am not an accountant. I am not a tax lawyer. This is not tax advice. This is an article about my experience and what kinds of forms I file. It’s equally about what forms many friends, associates, and colleagues of mine file on an annual basis. Your situation may be different. Thus, please check with a tax lawyer or accountant to verify any and all filing requirements that you may have.
FinCen 114 (FBAR) For International Bank And Brokerage Accounts
The name for this tax form changed from TD F 90-22.1 to FinCEN Report 114 in 2013. This, and the fact that many of us in the business still refer to it as the FBAR, has caused some confusion.
The FBAR tax form stands for Foreign Bank Account Report. FBAR refers to Form 114, Report of Foreign Bank and Financial Accounts. This is one of the most critical filing requirements. You file it with the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury.
Any US person controlling or owning foreign accounts with a total value over $10,000 must file FBAR
This includes taxpayers with interest or signature authority over the account. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account(s) with more than $10,000 must disclose these accounts to the U.S. Treasury. This rule also requires filing if the average balance across multiple accounts exceeds $10,000.
This tax form was created to require individuals to report money in offshore accounts. Though this form has been around for many years, FBAR hasn’t been strongly enforced by the IRS until a few years ago. In addition to filing the Foreign Bank Account form, the offshore account must be disclosed on your personal income tax return, Form 1040, Schedule B.
The FBAR is not filed along with a tax return to the IRS. Instead, you need to file it separately with FinCEN. With FBAR, you must report foreign stocks, securities, accounts at foreign banks or US bank branches abroad, mutual funds, and foreign-issued life insurance or annuities.
The law imposes a civil penalty of up to $25,000 or the greater of 50% of the account balance at the time of violation or $100,000 for failing to disclose an offshore account or credit card. Criminal penalties for willful failure to file an FBAR can also apply in certain situations. Keep in mind that the IRS can impose these penalties for each year.
Form 8938 For Specified Foreign Financial Assets
Tax form 8938 is for United States taxpayers who have certain foreign financial assets with an aggregate value of more than $50,000. You must file the form with the IRS along with your tax return.
The form is a requirement for those who have an interest in what the IRS calls “specified foreign financial assets”. These include financial accounts at institutions outside the US, such as bank accounts, investment accounts, and mutual funds. They also encompass stocks, bonds, and other securities issued by non-US persons, not held through an investment account. Additionally, they cover interests in foreign entities like corporations, partnerships, or trusts, and any financial instrument or contract with a non-US counterparty or issuer.
The IRS sets different thresholds for various types of taxpayers. For instance, an unmarried person living in the US must file Form 8938 if the market value of their foreign financial assets exceeds $50,000 on the last day of the year. Alternatively, they must file if the value is more than $75,000 at any point during the year. The required market value goes up to $100,000 and $150,000, respectively, if the return is filed by two married individuals filing jointly.
Form 5471 For Officers, Directors, Or Shareholders In Certain Foreign Corporations
IRS form 5471 is to be filed by US taxpayers who are officers, directors, or shareholders in certain foreign corporations. The form was created by a law that requires domestic corporations to provide their asset and balance sheets on their foreign corporations. Legislators created the law with the hope of stopping corporations from hiding money overseas. Today, the form isn’t just for large corporations. Actually, many individuals are required to file the form.
Taxpayers who meet any of the following requirements should use the form:
- A person who becomes a director or officer of a foreign corporation;
- A person who acquires ownership interest in a foreign corporation;
- Individuals who dispose of stock in a foreign corporation that reduces his or her interest in the foreign corporation;
- Those who control a foreign corporation for an uninterrupted period of at least 30 days in a year;
- Someone who is a 10% or more shareholder in a foreign corporation for 30 uninterrupted days in a year and owns that stock on the last day of the year.
Form 5471 is to be filed with an individual’s income tax return. Penalties for not filing can be very steep, including a fine of $10,000 or more.
To Wrap It Up: Don’t Get Tied in Knots Over Tax Forms
Navigating tax forms can be overwhelming. Understanding their ins and outs is key to avoiding hefty penalties and staying compliant with IRS regulations. Because tax laws can be complex, it’s wise to consult with a tax professional. They can provide personalized advice tailored to your unique situation. By staying informed and proactive, you can keep your finances in check, reduce stress, and ensure you’re meeting all your tax obligations. Remember, a little diligence now can save you from significant headaches down the road.
